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Super stress testing needs ‘further enhancements’

By Killian Plastow
 — 1 minute read

Australian superannuation trustees are not optimising the amount of liquidity they hold and improvements need to be made to their liquidity stress testing, according to APRA.

The prudential regulator said many superannuation trustees treated liquidity stress testing primarily as “a compliance exercise” and were not tailoring or appropriately using the results of their own tests.

“When, as is common, the primary focus of stress tests is on investment returns, it may lead to liquidity issues being overlooked,” APRA said.


“Stresses that affect liquidity may not necessarily impact returns or asset values immediately; in some circumstances, liquidity may be the most potentially severe risk faced by a superannuation fund in the short run – as occurred for some funds in the global financial crisis.”

The regulator cautioned that funds that fail to maintain adequate liquidity may be forced to sell assets during a market downturn, resulting in permanent capital losses that would otherwise be avoided.

“Liquidity stress tests help trustees understand the possible impact of deteriorating conditions on a superannuation fund’s investment portfolio, and the possible severity of such impacts,” APRA said.

“An enhanced understanding of a fund’s liquidity profile, and the likely impacts of an adverse liquidity environment, better enables a fund to determine the extent to which they are able to invest in illiquid assets on an ongoing basis, and hence to better optimise their decisions about required liquidity.”

APRA said that while some trustees put considerable effort into their stress testing, “quite a number failed to use the results in their investment decision making in any meaningful way” and more needed to be done.

“While some improvements have been made in liquidity stress testing across the superannuation industry since the introduction of APRA’s prudential standard on investment governance in 2013, further enhancements are needed,” the regulator said.

Speaking to InvestorDaily regarding APRA’s findings, Association of Superannuation Funds Australia chief executive Martin Fahy said that Australian superannuation funds “hold relatively high levels of cash and liquid assets” and were in a “good position” to pay benefits to members both now and into the future.

“Australian super funds have a strong cash position when compared to the rest of the world. According to Willis Towers Watson, in 2015 the pension asset allocation to cash in Australia was 17 per cent,” he said.

“This is a substantial number and significantly larger than other countries included in the same study – the closest being Switzerland with 7 per cent.”

Furthermore, super funds “were actually the source of liquidity in the Australian financial system in the GFC”, Mr Fahy said, adding that super funds’ asset allocation to cash has grown from 7 per cent in 2005 to 17 per cent in 2015.  

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Super stress testing needs ‘further enhancements’

Australian superannuation trustees are not optimising the amount of liquidity they hold and improvements need to be made to their liquidity stress testing, according to APRA.

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